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QE2 Reality Check

January 19, 2011 Comments off

The Federal Open Market Committee (FOMC) announced on November 3, 2010 that it would purchase longer-term Treasury securities at a pace of $75 billion dollars per month through the Federal Reserve’s Permanent Open Market Operations (POMO) facility by the end of the second quarter 2011 and potentially beyond. The Quantitative Easing Two (“QE2”) program, championed by Ben Bernanke, chairman of the U.S. Federal Reserve, is expected to total at least $600 billion — and may well total more, if Bernanke and the FOMC deem it to be necessary.

Currently, QE2 is expected to continue until the end of 2011, i.e. up to $1.2 trillion, although there is ongoing policy debate within the Federal Reserve amidst growing fears that the policy may backfire.

MB plus QE2 

Chart courtesy of Shadow Government Statistics

Monetary inflation is one result of QE2 because when the Federal Reserve buys U.S. Treasuries it injects newly created money into the financial system which, in turn, reduces the value of the U.S. dollar (due to the increase in the quantity of dollars). A lower U.S. dollar could stimulate U.S. exports but could have unintended consequences, such as creating excess liquidity that could lead to asset price bubbles in the U.S. Read more…